Federal Reserve Makes Killer Profits Building The Balance Sheet? (AIG)

In Las Vegas it pays to be the house.  Apparently this is true in Washington D.C. as well.  The Federal Reserve System has now released the 2011 combined annual comparative financial statements.  The reports are for the Federal Reserve Banks and its units which were designed to respond to strains in financial markets.

The Federal Reserve Banks’ 2011 net income came to $77.4 billion, which is said to have been derived primarily from $83.6 billion in interest income on securities acquired through open market operations.  These include Treasury securities, federal agency and government-sponsored enterprise mortgage-backed securities, and GSE debt securities.  Profits were high, but it looks like it was because of the securities held.

The Reserve Banks provided for payments of $75.4 billion of their 2011 net income to the U.S. Treasury.

Total Reserve Bank assets at the end of 2011 rose by $491 million over the end of 2010 to a level of $2.919 trillion.  Here is the breakdown: U.S. Treasury securities increased by $683 billion, GSE debt securities holdings fell by $45 billion, and federal agency and GSE MBS holdings fell by $156 billion. The balances held under central bank liquidity swap arrangements rose by $99.7 billion.

The closing of the American International Group, Inc. (NYSE: AIG) recapitalization plan in January 2011 actually resulted in asset reductions of $47 billion.

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JON C. OGG